Tuesday, April 30, 2013

A documentary which was more than a little critical of the
financial services industry, the PBS Frontline episode The Retirement Gamble, has generated a storm of controversy. Today,
in a stunning reversal, the producers of the PBS’ Frontline episode have
reversed their views and now agree with their critics (Wall Street firms and
insurance companies). These producers now agree that the focus of the
documentary on fees was misplaced. The
producers now embrace the view that higher fees and costs nearly always lead to
better investments, as Wall Street currently attests.

Said the producers in a recent interview, “Most illuminating
to us is the discovery of group annuity fees, often 1% a year or greater. Imagine the
huge benefits such additional fees must be generating for investors in 401(k) accounts. We can
only speculate at the many advantages investors must be accruing from such
costly ongoing fees.”

This is not to say that economies of scale are not possible
in 401(k) plans. In fact, several Wall Street executives were heard to say, in
response to the PBS Frontline show: “Of course, there are economies of scale.
The more Americans put into their 401(k) accounts, the greater our personal
economies get. Our fees go up and up, and we rarely are pressured to cut them.”

Fortunately for the producers, in an interview at www.FiduciaryNews.com, a popular web
site covering the retirement investment industry, Craig Morningstar, Chief
Operating Officer at Dynamic Wealth Advisors in Scottsdale, Arizona was quoted
as saying that “the show only covered 1/3 of the typical hidden fees.” The
producers felt relieved, as they now have even greater belief that the
even-higher-than-suspected fees must
result in “SUPER INVESTMENTS.” The producers added, “We are so glad that we
omitted discussion of the '28 hidden fees' which Neda Jafarzadeh, a Financial
Analyst at NerdWallet Investing, San Francisco, observed were present, in the
article posted at www.FiduciaryNews.com. [For the entire article, visit http://fiduciarynews.com/2013/04/exclusive-interview-frontline-producer-explains-controversial-401k-documentary-the-good/]. All of these fees must ... must ... be good for investors."

Of course, the strong negative correlation found in academic research
between higher fees and long-term investment returns has not gone overlooked. The
producers of the PBS Frontline documentary have agreed with Wall Street,
“Statistics, of course, never speak the
truth. Active management must trump
low-fee, low-turnover passive index investing. It’s just common sense. For if
that were not the case, why would we spend all that money
advertising actively managed, high-cost investment strategies?”

The lack of academic evidence supporting the superior returns of
index funds over actively managed funds, on average, over time, has not
deterred the producers. The producers now cite Christine Marcks, President of Prudential
Retirement, who was asked in the documentary about the overwhelming evidence that
exists on indexing beating expensive active investing. Her response, with a
straight face, was, "Yeah, I haven't seen any research that substantiates
that. I mean, it – I don't know whether it's true or not. I honestly have not
seen any research that substantiates that." The fact that one of the
largest providers of retirement plans in the country has not done due diligence
on this issue, by examining the academic evidence, does not deter these tireless producers, who were heard to state: “When a Wall Street executive speaks, the public must believe her. We all know that we
should place blind trust in Wall Street and the insurance companies, especially after the financial crisis of 2008-9 and the great actions taken by Wall Street firms thereafter to restore faith in the securities industry, by returning to high levels of profitability so soon while individual investors and small businesses continued to suffer.”

The producers of the PBS documentary are now working
tirelessly on a sequel, “The Retirement
Gamble II: Why We Should Ensure the Bonuses Paid to Wall Street’s Executives
and Analysts, To Ensure Their Retirement Succeeds.” Stated one of the
producers, “It is so important that at least a few Americans have a successful
retirement. In that way the rest of us can applaud the success of the few, who
took so much from us. We have to have someone to cheer about, when we are in
our used trailer in Florida watching old PBS documentaries on over-the-air
television, while sweltering in the oppressive heat because we cannot afford to run the air
conditioning. Financial security is, of course, so over-rated; the anti-depressive effects of
cheering on in retirement those early-retired Wall Street and insurance company
employees who profited so much by their greed should not be underestimated.”

The producers are also relieved that 85% of “financial advisors” were found, in the original documentary, to not be fiduciaries. (As stated in the original PBS Frontline documentary, only
15 percent of advisers are “fiduciaries” — advisers who by law must operate
with the best interests of the plan sponsor or plan participant in mind.) The producers stated: “We are so glad that there
are so many choices available. We would never want to limit the many business
models, nor reduce the number of non-trusted advisors from which we can choose. Wall Street
and the insurance companies should be able to extract excessive fees and costs
from us in many different ways ... Why? Because it's what they do best!”

The producers added: "Is it too much to ask that financial advisors act in the best interests of their clients? Yes, of course it is, for that would destroy the high extraction of rents which occurs by Wall Street from the overall U.S. economy. Isn't it great that over 35% of the profits generated by the U.S. economy now occur in the financial services sector ... and that doesn't even count the huge bonuses awarded to Wall Street's executives! We certainly don't want to disrupt the high profits of our Wall Street firms and executives, just for the sake of the expectation of a consumer that his or her advisor is acting in the consumer's best interest. Let's not sacrifice Wall Street profits for some nebulous 'principle'!"

Asked about the fiduciary standard, the
producers now question their earlier promotion of a higher standard for all retirement plan advisors, stating: “Who cares about a standard that consumers
can’t even spell?” When asked about the huge potential benefits, in terms of lower fees and costs, which would result for 401(k) and IRA investors if ERISA's strict fiduciary standard were to be applied, the producers replied, "We should never interfere with a centuries-old business model. The dinosaurs that are Wall Street's proud institutions need not face an extinction event, simply because consumers desire trusted advice."

Upon hearing of the PBS Frontline documentary producers’ “change of heart” and their embrace of all of the hype promulgated by Wall
Street, some industry observers were more than a little perplexed. Then again, an
explanation soon became apparent. It was overheard that the producers' next documentary would be
funded by a generous donation from FINRA, SIFMA, FSI, and many broker-dealer
firms and insurance companies, with huge salaries to be paid to the producers
along the way. When questioned regarding their objectivity in response to these
new sources of funding, the producers brushed aside such concerns. “Of course
we need higher salaries. This permits us to save more for retirement, as we have and will continue to promote. Only in such way can we ensure the high extraction of rents from our retirement
accounts by Wall Street. Even though Wall Street is paying us a lot to do this
next documentary, we are certain they will get their money back, and then some,
over time. It will all balance out."

This interviewer then questioned the producers. "What about the trust of individual Americans in our financial services system? Without trust, investors have and will flee the capital markets, depriving American business of much-needed capital, and driving up the cost of capital. This will impose a brake on U.S. economic growth, leading to lower standards of living for all Americans than what could have been obtained." The producers responded, "We are so glad that we never paid attention in our college Macroeconomics class."

Stay tuned for more in "The Retirement Gamble" documentary wars. Wall Street and the insurance lobby are gearing up for "the next big show," confident that their message of "high costs, high fees, speculative products, and ensuring the financial security of Wall Street firms and their executives by preserving archaic, conflict-ridden business models" will resonate conclusively in the halls of Congress.

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Ron A. Rhoades, JD, CFP® sailed across the Atlantic on a tall ship, performed in theme parks and road shows in Europe and America as a Disney character, rowed on a championship crew team, marched in the Macy’s Thanksgiving Day Parade, marched in competition with a state-champion rifle drill team, undertook a solo one-week trip into the Everglades, escorted numerous celebrities around Central Florida, performed as a “Tin Man” at a mountaintop theme park called “The Land of Oz” in Beech Mountain, NC, and served as a stage manager and talent scheduling coordinator for entertainment productions at Walt Disney World. And then he graduated college.

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Ron Rhoades was the recipient of The Tamar Frankel Fiduciary of the Year Award for 2011, from The Committee for the Fiduciary Standard, as he “altered the course of the fiduciary discussion in Washington.” He was also named as one of the Top 25 Most Influential persons associated with the investment advisory profession in 2011 by Investment Advisor magazine, and was voted to the “Sweet 16 Most Influential” in Wealth Management’s 2013 “March Madness” competition. Dr. Rhoades was also named as one of the "Top 30 Most Influential" members in NAPFA's 30-year history in 2013. This blog was also called one of the "Top 25 Most Dangerous" in financial services.

Ron A. Rhoades, JD, CFP® became Program Director for the Financial Planning Program (B.S. Finance, Financial Planning Track) at Western Kentucky University's Gordon Ford School of Business in July 2015. He provides instruction to highly motivated, exceptional undergraduates students in such courses as Applied Investments, Retirement Planning, Estate Planning, and the Personal Financial Planning Capstone course. He has previously taught courses in Insurance & Risk Management, Employee Benefits, Money & Banking, Advanced Investments, and Business Law I and II.

Ron also serves on the Steering Committee of The Committee for the Fiduciary Standard, on whose behalf he frequently travels to Washington, D.C. to meet with policy makers in Congress and in government agencies regarding the application of the fiduciary standard to personalized investment advice.